Risk jobs – Credit vs. Treasury vs. Market Risk roles

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Risk jobs – Credit vs. Market vs. Treasury analysts roles

Here is how it has played out for the last ten years. I start wrapping up a risk training workshop or an evening class from my executive MBA students and a member of the audience walks up to me in Dubai, Abu Dhabi or Singapore. After we exchange pleasantries the question comes.

I am really interested in risk. What is your advice? Where should I go, what should I focus on?”. A simple question but one that always takes a while to answer.

Risk jobs. The two risk roles

If you are interested in risk and you work for the banking industry you have two choices.

The first choice is Treasury and Market Risk.

It is a role that deals with questions of value and changes in value . Primarily a modeling and valuation business and your value to your desk and the bank is in direct relationship to the accuracy of your model and your ability to predict and forecast swings in market prices before they occur. You can increase that value significantly by walking away from your Excel models and focusing more on deal flow but that requires a different skill set. An ability to bring themes from markets, business, economy, client relationships and your model together so that a transaction may conclude.

The challenge in market risk is that in most cases if you work for market risk you are wrong. Because the models you rely on are wrong, they are inaccurate by definition and design. They represent approximations to the real world. Not your fault but this is how the game is structured.

In most cases as long as your bosses understand this and the hierarchy of the bank understands this, you will be fine and may even do well. If your bosses do not understand this (also quite common) then market risk may not necessarily be your best bet because one fine morning your model will blow up and try to kill the bank and you will be part of the team held responsible for that failure.

So when you go and interview and talk and meet the team, it is very important for you to assess the person and the team you are going to work for. So if you work for treasury, investment management, fund management, corporate cash management, money management, market risk management, the person who will be responsible for your well being, who decides how well you do your job and if you deserve to survive and retain your role is the treasurer. He gets it. He plays with it every day.

But because of a conflict of interest with risk, the person you can get along best with, who understands what you do and why it is important sits on the other side of the table. While you report to the head of risk or the head of risk policy, who, because 90% of a typical bank’s exposure comes from credit risk, comes from credit risk. While these individuals are very qualified, educated and experience, the treasury function for them is the closest thing to black magic/voodoo a bank can have. They generally don’t get it and even if they try and they do, they will always be frictions supervising, guiding and mentoring you.

Unless and until the head of risk comes from an investment and treasury management background, option to work for treasury or market risk desk may not be the best possible long term career choice. You can experiment and build your profile in your initial years but till you find a boss who understands that prices move outside of models, the models break, that crisis arrive without warnings, don’t get too comfortable in that role and don’t expect to be pampered.

You will not have an issue initially because turmoil in most cases will be above your pay grade. As you rise and the profile of your work rises managers and board members are increasingly likely to question the utility of your work. And if you hit turbulence in markets and the bank books a loss on account of that turmoil the common question board members and share holders will ask is “What was risk doing?”, “Where was it when we needed it?”, “Why are we paying you so much money?”

If you accept a role in market risk, remember the first years will be very exciting as you walk through the learning curve. But when you start moving beyond models pick people and teams you will end up working with very carefully.

Risk Jobs. The credit risk option

Your second option is credit risk. Credit risk is always looking for talent because this is the core focus of the bank. You can never have enough relationship managers or analysts. Credit is entertaining, its engaging, it has people rather than models. If the models breakdown you can always blame it on the customer, on the economy, or on bad data. Even then central bank and regulators give you space and leeway in provisions and recoveries because you are essential to the health of the system.

Most importantly you are expected to drop some cash on some customers because there is no lending without default. Compared to treasury function where a small loss with leverage can wipe out a large part of your capital base, in credit you lend in syndicates and some losses are always expected. Treasury on the other hand is absolute and time dependent. A trade is a call on direction, sometimes you are right, sometimes you are wrong. When you make money on a trade you are golden (within reasonable limits), but if you start bleeding capital your head can roll easily. A single deal and ensuing relationship can feed you in credit for years. In treasury you have to identify, hunt and kill your game every alternate day. In credit you hunt together as part of a team, in treasury you do it alone.

Treasury is absolute and unforgiving, credit is not. Because board members do not understand what you do, as a treasurer you are generally not trusted. Maybe trust is too strong a word. You are viewed as a speculator, a wild one who is only looking for right opportunity to bet the bank. Because with a flick of a finger you can kill a bank, there are many more controls and checks and balances on what you can or cannot do as part of the treasury team, compared to the credit function.

It’s not that one path or one function is better or preferred over the other it’s just that you need very different personality profiles to do well in these two functions. Whether you work for the head of treasury or the head of credit, you will likely find both to be very reasonable, successful and intense professionals. However the two of them will have very different criteria for what they would consider a brilliant performance and a must have team player. Two definitions that will determine how well you will do as part of their team.

There is a common leading indicator of how it will play out for you in the future. Whether it is the head of credit or the head of treasury, the best talent comes from the business side. If you find someone from the business side you will do well and grow well. If you find someone from purely the modeling side, everything they do will be academic and numbers driven. Sometimes in order for you to survive you have to look beyond the numbers and look at the context. Business trains you to think that way. Models don’t.